Revs up, subs down at new Napster

Free service lowers subscriber base

Online music company Napster moved close to being in the black last quarter but spooked investors with the surprising revelation that it lost subscribers, due in large part to its new free Web offering.

Revenue grew 34% to $28.1 million compared with the year-earlier quarter, helped in part by a one-time $1.9 million revenue boost that otherwise would have left it up 25%. Net loss was down 51% to $9.6 million.

Without the one-time boost related to pre-paid download cards that were purchased but not used by consumers, Napster’s financial performance would have been worse than that of the previous quarter, ended March 31.

Company’s subscriber base declined 7% to 512,000. It blamed the drop on the ad-supported Web site’s recent offering of a free, limited version of the Napster service.

CEO Chris Gorog said Netco will focus in the second half of the year on converting more Web users to paying subscribers.

Company is also focusing on the cellular market, where it has partnerships with SunCom and Japanese wireless giant NTT DoCoMo. Mobile is the only area of the digital music space in which Napster is clearly ahead of its competitors.

Revenue is expected to decline to about $25 million in the current quarter and then resume growth in the fall and winter.

Shares in Napster closed up 5% at $2.75 before earnings were announced, then dipped 2% in after-hours trading.